Venture Capital

Pickwick Electronics is a new high-tech company financed entirely by 1 million ordinary shares, all of which are owned by George Pickwick. The firm needs to raise $1 million now for stage 1 and, assuming all goes well, a further $1 million at the end of 5 years for stage 2.

First Cookham Venture Partners is considering two possible financing schemes:

1. Buying 2 million shares now at their current valuation of $1.

2. Buying 1 million shares at the current valuation and investing a further $1 million at the end of 5 years at whatever the shares are worth.

The outlook for Pickwick is uncertain, but as long as the company can secure the additional finance for stage 2, it will be worth either $2 million or $12 million after completing stage 2. (The company will be valueless if it cannot raise the funds for stage 2).

Show the possible payoffs for Mr. Pickwick and First Cookham and explain why one scheme might be preferred. Assume an interest rate of zero.

Solution Summary

Pickwick Electronics is a new high-tech company financed entirely by 1 million ordinary shares, all of which are owned by George Pickwick. The firm needs to raise $1 million now for stage 1 and, assuming all goes well, a further $1 million at the end of 5 years for stage 2.

First Cookham Venture Partners is considering two possible financing schemes:

1. Buying 2 million shares now at their current valuation of $1.

2. Buying 1 million shares at the current valuation and investing a further $1 million at the end of 5 years at whatever the shares are worth.

The outlook for Pickwick is uncertain, but as long as the company can secure the additional finance for stage 2, it will be worth either $2 million or $12 million after completing stage 2. (The company will be valueless if it cannot raise the funds for stage 2).

Show the possible payoffs for Mr. Pickwick and First Cookham and explain why one scheme might be preferred. Assume an interest rate of zero.

Recent Feedback

"This is great!!!!!!!!!!!!!!!!!! Thanks a lot. Paulette."

"Thank you for your explanations!"

"Thank you for your help and support by helping me answer these problems and questions. Hopefully will will be able to continue to help in the weeks to come. Thanks a lot you are great, supper smart, and wonderful. Hopeful I did not use too much of your time. Mary Odele"

"Thank you very much! I have 1 more problem like this listed if you could please help me on this last problem i'm officially done with this course!! Thanks in advance your amazing!"

"thanks so much! Your response really helped me out a lot and you explained the answers in detail. Thank you"